HSC Conference Focusing on the Nation's Health Care System Finds It Is in Tremendous Turmoil

Conference Executive SummaryNovember 19, 1999

WASHINGTON, D.C. - The U.S. health care industry continues to undergo tremendous turmoil, with the consumer backlash against managed care driving many health care organizations to rethink and, in some cases, dismantle strategies they pursued in the past. Thats according to new research presented at a November 16, Center for Studying Health System Change (HSC) conference "Update on the Nations Health Care System: Results from Tracking 12 Communities, 1997-1999." Click here for a complete transcript of the conference.

HSC researchers and collaborators provided an overview of the major changes observed across markets during the past two years and an in-depth examination of two topics of particular interest - the strategies of specialty physicians and the changing nature of Blue Cross and Blue Shield Plans. Outside experts responded to the results presented by HSC.

HSC, a nonpartisan research organization funded exclusively by The Robert Wood Johnson Foundation, conducts surveys every two years of households, physicians and employers in 60 communities that are representative of the country, as well as site visits in 12 of those communities.

Overview of Market Change, 1997-1999

The last two years have seen a retreat from highly managed products, as employers, especially those in labor-tight markets, have sought to accommodate consumers demands for broad networks and easy access to specialty care. The strong economy and modest premium increases during this period contributed to this trend.

Meanwhile, slower-than-anticipated growth of health maintenance organization (HMO) enrollment in some local markets has caused problems for providers who prepared for significant managed care business that never materialized. The use of global capitation has also not grown as expected, because plans are reluctant to shift responsibility to providers, many of whom have failed to manage risk adequately. Many providers also are much more cautious with respect to risk-sharing.

Health plans and hospitals alike are turning away from vertical integration, a costly strategy that required them to stretch beyond their core competencies. Paul B. Ginsburg, Ph.D., president of HSC, also noted that because vertical integration works best when insurance products have limited provider choice, it is less likely to succeed in the current environment. Indeed, many health plans and providers that reorganized to deliver closed-panel products are now "trying to play tennis in hockey gear, and its not a pretty picture," remarked Jeff Goldsmith, Ph.D., president of Health Futures.

Ginsburg reported that industry consolidation has resulted in organizations taking on an increasingly regional and national focus. But while health plans continue to consolidate rapidly, merger activity among hospitals has slowed considerably, due largely to two phenomena: the fact that in some markets there are now only two to three hospitals,and the absence of an aggressive Columbia/HCA organization as a competitive threat. Most hospitals involved in mergers are driven by a desire to extend geographic reach within their local communities and to enhance their position with insurers, Ginsburg noted. To date, consolidation efforts by providers have done little to reduce excess capacity within the health care system or reduce service duplication. Goldsmith characterized hospital and plan consolidation as "a flight from competition" - as an effort to increase market power, rather than to compete directly on the basis of cost or quality.

Meanwhile, physician organizations continue to search for ways to protect their members eroding incomes and autonomy. Physician practice management companies (PPMCs) and physician-hospital organization (PHOs) have not been successful as mechanisms for providers to survive under managed care. Now, organizations that are physician-led and less costly to operate, such as independent practice associations (IPAs) and management service organizations (MSOs), appear to be gaining favor. Goldsmith, however, was not optimistic about the ability of these organizations to manage risk successfully.

Specialists Jockey for Position

Specialists, which control a substantial portion of health care spending, are responding to intense competitive pressure in their markets with strategies that are designed to enhance their leverage and that increasingly put them at odds with local hospitals. According to Jon B. Christianson, James A. Hamilton Chair in Health Policy and Management, University of Minnesota and a consultant to HSC, these activities have increased dramatically. Examples of specialists strategies include:

To capture additional revenue, specialists in some markets are establishing freestanding surgical centers that compete directly with hospitals. Respondents in seven of the 12 markets visited by HSC reported significant growth in the number of these centers. In Cleveland, for example, the number of freestanding surgery centers increased from seven to 12 in two years.

In other markets, several single-specialty groups have banded together - creating, in effect, single-specialty monopolies in geographic submarkets. These mergers are strategic moves intended to improve specialists position with managed care plans while passing muster with anti-trust enforcers.

Christianson noted that specialists success in protecting their incomes vary greatly across markets. Factors in specialists favor include the decline of gatekeeping, a continuing demand for broad networks, the retreat by some plans from care management and some hospitals interest in equity partnerships with specialists. Negative trends for specialists include further reductions in Medicare reimbursement (which in turn affect reimbursement from health plans), continuing difficulties in forming and sustaining physician organizations and the uncertainty surrounding increasing cost pressures.

It is unclear how specialists efforts to protect their incomes ultimately will affect consumers. Marsha Gold, senior fellow at Mathematica Policy Research, Inc., observed that, depending on how specialists activities play out in local markets, they could lead to fragmentation of care, increased administrative costs and skimming of lower-risk patients. On the other hand, there is also an opportunity to improve care delivery through more standardized and quality-focused contracting and better coordination with primary care physicians. The outcomes of these strategies carry important implications for how consumers access and receive care, Gold noted.

Being "Blue" in Todays Market

Blue Cross and Blue Shield Plans (BCBS), which provide coverage for one in four Americans, have played a unique role in the U.S. health care system and that role is evolving, HSC researchers found.

Despite the perception that BCBS plans have difficulty competing in todays managed care environment, they in fact continue to be important players in many health care markets. In seven of the 12 sites visited by HSC researchers, Blues plans were the dominant insurers, and they were major competitors in the remaining five sites. The strong market position of Blues plans is largely attributed to their extensive preferred provider organization (PPO) and indemnity business, even in markets where they have thriving HMOs.

While many of the Blues traditional advantages and disadvantages are eroding, they are adapting to the changing marketplace. For example, many Blues plans started as collaborative efforts with local hospitals and embraced a community mission that brought with it a unique regulatory arrangement. In exchange for special tax treatment, they carried the responsibility of being the insurer of last resort. Exclusive service areas and little local competition helped many Blues plans build large market shares and develop brand name recognition among consumers.

But times have changed, HSC research assistant Bradley Strunk noted. Today, the Blues are largely not subject to differential regulatory treatment. For most plans, the responsibility to be the insurer of last resort was dropped during the late 1980s and early 1990s, Strunk reported. Furthermore, the special federal tax exemption that the Blues enjoyed was largely eliminated in 1986.

The erosion of differential regulation does not mean that the Blues face a completely level playing field, however. In many of HSCs study sites, respondents from Blues plans said that they continue to face expectations to serve in a community benefit role, despite the lack of a requirement to that effect. As a result, BCBS plans sometimes face unique regulatory and public scrutiny, which, combined with other factors, may affect their ability to implement mergers, convert to for-profit status, exit unprofitable business lines or introduce new products.

Traditionally, Blues plans have not been perceived as industry innovators. But Strunk cited several cases in which Blues plans have leveraged their distinguishing factors to implement innovative strategies. In Seattle, Regence Blue Shield used provider profiling data to develop a highly successful point-of-service (POS) product. BlueCross and BlueShield of South Carolina has tapped on its experience in processing claims to market those services to outside organizations.

Edward H. ONeil, Ph.D., M.P.A., director of the Center for Health Professions, noted that Blues plans now have an opportunity to redefine their traditional public benefit role at a time when there is a great deal of uncertainty and angst in the industry. But, he said, many plans instead are "pulling back from that public benefit. and thereby, perhaps, giving up a big piece of an important part of their legacy."

Looking Ahead

In general, conference presenters noted that the trend among health care organizations to move away from strategies of the past have left them with no clear vision for the future. In some cases, Christianson noted, organizations have turned away from focusing on customer needs to protect their revenue at a time when consumers are asserting themselves and expressing their dissatisfaction with the health care system.

Presenters agreed that consumers are becoming an increasingly important force in the industry. "The consumer voice is being heard and the industry has changed as a result of it," said Christianson, citing the continuing trend toward broad-panel plans and easier access to specialists. In addition, said Goldsmith, consumers are demonstrating a "tremendous hunger for better and more accessible information about their own health." Plans and providers alike would do well to respond to this desire by developing innovative ways to provide consumers with the information they need to make better health care choices, he said. Internet technology, he and others suggested, could be an important component of that response.

Christianson observed that, as the health care industry continues to undergo rapid and dramatic change, it is also being pulled in conflicting directions by health plans, providers, consumers, purchasers and regulators. It may not be possible, he suggested, to "find a model or an approach that is going to accomplish all of the things that we want from our health care system." Given the range of variation in local markets and the complexity of forces at work in these markets, it is difficult to predict how the system will evolve.